One of the terrible things about taking interest rates to near zero and keeping them there is the savers in this country get murdered. Long gone are the 5% CDs that were offered at many banks less than 10 years ago. For investors looking to build income portfolios the choices are small. Sure, there is more yield everywhere, but the higher you go up the yield ladder, the more risk and potential volatility you add into a portfolio. The bottom line is, after all these years of low rates, what is an income investor to do?
The analysts at UBS feel your pain. In a new research report, they look through multiple asset-classes to give investors some income ideas that have at least some level of safety. They screened stocks, including preferred stocks, master limited partnerships (MLPs), real estate investment trusts (REITs) and even closed-end funds, searching for the highest yield with the best level of safety. With the prospect of rising interest rates still at the minimum a 2015 event, some quality income ideas may be just the ticket for investors looking to bridge the gap to when yields on more conservative ideas move higher.
We regularly feature the additions and deletions to the Dividend Ruler equity list. Here are the top two yielding domestic names, sorted by category.
Dominion Resources Inc. (NYSE: D) is a newcomer to the UBS list. The utility pulled in operating revenue of $3.2 billion for the three-month period, beating estimates by 4.8%. Although Dominion boosted sales, it kept less than expected as profit. Fourth-quarter adjusted earnings per share clocked in at $0.80, or $0.08 below analyst estimates. Investors are paid a 3.4% dividend. The UBS price target for the stock is $73. The Thomson/First Call estimate is $68.35. The stock closed Wednesday at $70.64.
Intel Corp. (NASDAQ: INTC) has resided in the list for some time and the chip giant may be due for an up year. Commercial PC purchases have picked up and the company is working on boosting the ability of its general-purpose processors to move high volumes of data. Shareholders are paid a very nice 3.6% dividend. UBS has a $24 price objective. The consensus price target is $25.19. Intel closed Wednesday at $24.50.
Top preferred securities make an excellent addition to income portfolios. They trade on listed exchanges and can be easily bought and sold. The securities have solid credit quality and can appreciate in price. One note, many are callable, usually at the $25 level, and the symbols can vary. It is important to check with your financial advisor or brokerage firm for details on these securities.
Citigroup Inc. (NYSE: C) has some Preferred J shares that trade as Citigroup Preferred J (NYSE: C.J) as a solid preferred to buy. The security has a 7.125% coupon and is trading above its $25 issue price. At that level the yield to call (which is $25) is posted at a 6.67%. That figure is paid quarterly to investors. It is a fixed to float security, which means at one point the yield will be based on floating scale, typically a LIBOR plus figure. Citigroup Preferred J closed Wednesday at $26.55.
Morgan Stanley Preferred E (NYSE: MS.E) is another quality preferred backed by a major Wall Street firm. The Morgan Stanley (NYSE: MS) security is also a 7.125% coupon, fixed to floating security. It was also trading above the $25 issue price for a yield to call of 6.66%. The dividend is also paid on a quarterly basis. Morgan Stanley Preferred E closed at $26.74.
Real estate investment trusts may be an outstanding avenue for more conservative income investors. The UBS analysts stand strong by their belief that commercial real estate should generally be a beneficiary of improving economic activity. They have highlighted three top names to buy. Note that REIT distributions may contain return of principal.
W.P. Carey Inc. (NYSE: WPC) is a stock to Buy, and is on the UBS High Conviction call list. The UBS team like the combination of asset management and property ownership with significant recurring revenues. The recently completed merger with Corporate Property Associates 16 should be very accretive to funds from operations and dividends. Investors are paid an excellent 5.6% distribution. The UBS price target is $74, and the consensus target is $73. The stock closed Wednesday at $61.76.
Home Properties Inc. (NYSE: HME) is another top REIT name to buy at UBS. The stock trades at significant multiple and cap rate discounts to the multifamily group despite having the highest dividend yield, the lowest tenant turnover in a group of their peers. The stock pays investors a 5% distribution. The UBS price target is $56, and the consensus is at $60.77. The stock closed Wednesday $58.45.
Simon Property Group Inc. (NYSE: SPG) is another industry giant that is a top name to buy at UBS. The company recently announced plans to spin off its strip malls and smaller enclosed malls into a new company. That will allow the mall giant to focus on its higher-end enclosed malls and outlets. The move will be a good one for shareholders on multiple fronts, but such transactions do not always play out this well. Shareholders are paid a solid 3.1% distribution. UBS has a $188 price target, and the consensus target is $180.32. Shares ended Wednesday at $160.18.
Two Harbors Investment Corp. (NYSE: TWO) is one of the many hammered mortgage REITs that were hit hard when interest rates started to rise last year. The UBS analysts think that its diversified portfolio and move to a more defensive posture on rates makes it a top real estate name to buy in 2014 and beyond. Investors are paid an outstanding 10.4% dividend. The UBS price target for the stock is $10.15, and the consensus was not posted. Two Harbors closed Wednesday at $9.99.
John Hancock Preferred Income Fund (NYSE: HPF) is a top income name to play in the closed-end fund arena. The UBS analysts view this fund as one of the top ways to participate in the preferred markets at a discount to the fund’s net asset value (NAV). The fund places most of its capital in preferred and convertible securities. The current NAV is posted at $19.85. Investors are paid a 8.81% dividend. The stock closed Wednesday at $19.06.
The UBS team also has two top MLPs for investors to consider. MLPs can also provide return of principal to investors.
Memorial Production Partners L.P. (NASDAQ: MEMP) is a newer name to the game, having gone public in 2011. With a strong acquisition track record, high reserve to production ratio, affiliation with a drop-down sponsor and a solid coverage ratio providing headroom to improve future distributions, the UBS analysts believe the trading multiple should move in line with the sector, resulting in attractive returns from near-term potential upside. Investors receive a 10 % distribution. The price objective for the stock $24, and the consensus target is $24.09. Memorial closed Wednesday at $21.74.
Enterprise Products Partners L.P. (NYSE: EPD) remains at the top of many Wall Street firms’ list of stocks to buy. Through the nine-month period ended September 30, Enterprise Product Partners reported its gross operating margin rose to $3.53 billion, from $3.23 billion generated in the same period the year prior. In percentage terms, that represents a very healthy growth rate of more than 9%. The fourth quarter was solid as well. Investors are paid a 4.20% distribution. The consensus price target is $72.10. The stock closed Wednesday at $66.08.
The UBS team has found higher yielding securities that investors can at least sleep better at night with. While none replace the 5% CD, they all have consistently paid solid dividends and offer investors a yield break until rates start to move higher next year, or at the very latest in 2016.